Should I take a Tracker or Fixed rate on my Mortgage ???

Many of our clients are asking about Tracker Mortgages at present given they are in some instances quite a lot lower than fixed rates. The risk is of course payments could rise.

Whilst this article is aimed at intermediaries such as us, it gives interesting insight into what experts think will happen to Bank of England base rate in the coming year, which will have a direct impact on some Tracker Mortgages…

BoE rate predicted to peak in second quarter of 2023

Financial markets are currently pricing in a 78 per cent chance that rates will rise to 3.5 per cent.

A survey of 54 economists by Reuters found that the majority expect a 0.50 per cent rise. Only two said they expected a 0.75 per cent increase next week compared to 13 of 56 asked in November.

It’s predicted that after next week, the BoE will add another 0.50 per cent in the first quarter of 2023 and 0.25 per cent in the second. The rate will then peak at 4.25 per cent.

The BoE has repeatedly hinted that it will continue to raise rates in response to high inflation, which is currently at 11.1 per cent, far beyond the government’s target of 2 per cent.

A rise of 0.50 per cent is also predicted by the ratings agency Fitch, and it says it will rise by a further 1.25 per cent to a peak of 4.75 per cent by the second quarter of 2023.

This is much higher than the 3 per cent peak which was predicted in September and it says the higher rate partly reflects the extreme volatility seen in UK financial markets in late September and early October.

“Not out of the woods yet”

Experts at Deutsche Bank are also predicting a rise of 0.50 per cent to 3.5 per cent. They say good news around softening inflation expectations and easing recruitment difficulties mean the BoE won’t raise rates by the higher level of 0.75 per cent.

Sanjay Raja, senior economist for the bank, said: “The Bank isn’t out of the woods just yet. Persistent inflationary pressures alongside lingering labour market tightness should result in another ‘forceful’ hike.”

It is predicting the BoE will continue raising the rate until it reaches 4.5 per cent by May next year.

“Inflation fears trump recession dread”

Sarah Coles, senior personal finance analyst for Hargreaves Lansdown, said: “Inflation fears are expected to trump recession dread at the Bank of England next week. The market expects interest rates to rise again – this time up 0.5 percentage points to 3.5 per cent.

“It’s going to make life more difficult if your borrowing is linked to the base rate, but the impact on fixed rate mortgages and savings is more complicated. We may well see the weird phenomenon of base rates going up while savings and mortgage rates drop.”

Variable mortgage holders to see immediate impact

Anyone with a tracker or standard variable rate (SVR) mortgage will see an immediate hike to the price they pay each month.

The current rate for an SVR is 6.4 per cent, according to Moneyfacts, and if the full rate is passed on this will rise to 7 per cent on average.

Coles says for those on fixed-rate mortgages, it’s likely the 0.5 per cent rise has already been priced into the market.

She said: “The market is being driven by rate expectations further down the track, which have fallen dramatically since the surge that was powered by the mini-budget. As a result, the market now expects the base rate to peak at somewhere around 4.5 per cent or 4.75 per cent, before falling back as the recession takes hold.

“It means it doesn’t need to price fixed rates so high. Mortgage rates could fall further from here, but it’s not guaranteed, and there’s no clear picture of how long any more falls will take.”

https://www.mortgagesolutions.co.uk/news/2022/12/09/financial-experts-predict-next-weeks-base-rate-and-where-it-will-end-up/